TMI Blog1995 (12) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,73,427 11,93,026 .Difference Rs. 2,19,599, 2.2 The details of difference in the figures of closing stock shown in asst. yr. 1986-87 as given at pp. 2 and 3 of the assessment order for asst. yr. 1986-87 are as below: The assessee-company has hypothecation account with Dena Bank Sayaji Gunj, Baroda and it has submitted the statement of stock as on 31st Dec., 1985 as follows: . Kgs, Book value or cost price or landed cost whichever is lwer Rs. 1. Raw material, 5,035.360 1,97,370 2. Finished goods, 44,540.000 14,91,199 3. Semi Finished goods, 24,633.900 8,09,469 Total (excluding stored, spares, dies, etc.), . 24,98,538 While the details of stock as recorded in the books of account on the last day of the previous year are as follows: . Rs. 1. Raw material, 2,13,712 2. Finished goods, 12,46,698 3. Goods in projects, 6,63,938 Total including stores spares dies, etc., 21,24,348 It becomes very clear that there is a difference of Rs. 3,34,190 (i.e. Rs. 24,98,558 Rs.21,24,348 in the sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cases of other sister concerns such an in the case of Banco Aluminium Ltd. Gujarat Aluminum Extrusions (P) Ltd. and the same has been accepted and their respective assessments. 2.5(iv). The learned counsel further invited our attention towards an order under s. 144B of IT Act in the case of M/s. Gujarat Aluminium Extrusion Pvt. Ltd. for asst. yr. 1977-78 dt. 1st Sept., 1980 to show that the IAC accepted similar contention and directed that AO to delete the addition of Rs. 2,98,913 proposed in the draft order on the basis of identical facts and circumstances. 2.5(v). The learned counsel further invited attention towards the Guidance Note on Accounting treatment for Modvat issued by the Institute of Chartered Accountants of India along with illustrations given in Annexure 'C' of the said Guidance Notes to corroborate his contention that the method of accounting for Modvat credit/proforma credit of excise duty and the method of valuation of closing stock followed by the assessee is one of the recognised methods. 2.5(vi). He further pointed out that the quantity shown in the stock statement submitted to the bank and the quantities of closing stock shown in the financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme. (i) Given under the Modvat scheme, the ICAI has acknowledged certain circumstances which can lead to a distorted picture of profits and therefore recommends appropriate adjustments as per facts. This can be seen from paras 4.5, 4.6, 5.3, 5.4 5.5 of the relevant "Guidance Note". 3.1 In view of the above background, considering that the accounting period under consideration is 1st April, 1983 to 31st March, 1984 relevant to asst. yr. 1984-85, and since the Modvat scheme was introduced only w.e.f. 1st March, 1986, well after the end of the accounting period of the assessee, reliance on the method of accounting set out in the said "Guidance Note" is misplaced. The said "Guidance Note", has no application to the period under consideration. 3.2 "The Guidance Note" under reference has proceeded on the basis that Modvat credit available is similar to "rebate" or "duty drawback" which will reduce the cost of purchase since rr. 57A to 57J of the Central Excise Rules have been issued by Notification dt. 1st March, 1986 under the heading "Credit of Duty paid on Excisable Goods used as Inputs". 4. The Institute of Chartered Accountants of India has considered various Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Madras Bench of the ITAT in the decision in Southern Asbestos Cement Ltd. vs. Dy. CIT (1991) 38 ITD 449 (Mad), where it is held that value of closing stock should include excise duty paid thereon. 13. Reliance is also placed on the decision of the Hon'ble Supreme Court in CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) which held: "(i) even if the assessee had adopted a regular system of accounting it was the duty of the AO under s. 145 of the IT Act, 1961 to consider whether the correct profits and gains could be deduced from the accounts so maintained. (ii) that any system of accounting which excluded for the valuation of stock-in-trade all costs other than that of raw material for the goods-in-process and finished goods, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits." 14. The addition made by the AO, therefore, needs to be sustained. 15.1 The learned Sr. Departmental Representative also relied upon the reasons me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consumption, it should be also taken into consideration for valuation of closing stock, but in the present case the assessee has contended before the Departmental authorities as well as before us that the excise duty paid on purchase of raw material is not debited as expenditure, but it is debited in a separate account which after taking into consideration the set off availed against excise duty payable on sale of finished goods as shown in the balance sheet and has never formed part of expenses in the trading and manufacturing account. This undisputed fact clearly distinguishes the facts of the assessee's case from the facts of the judgments and Guidance Note relied upon by the learned Departmental Representative. 15.4 The assessee in its letter dt. 24th March, 1987 submitted to the AO has, inter alia, stated the following facts: "(4) Why Excise Duty not included in stock of P L a/c Excise duty not included in stock of P L a/c. because of we have not claimed excise duty as expenditure but we are getting set off against clearance of rate of stock shown in P L a/c. and in bank statement. The assessee in its letter dt. 20th March, 1987 submitted to the AO also explained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the computation of the trading results, the question of there being an element of profit/loss due to receipt/payment of excise duty never arose. In support, Shri Bhagwat produced relevant ledger, as also vouchers in respect of purchase of raw material to show that the value of purchase was debited to the trading account, whereas the excise duty paid was taken to a separate account. On these facts, Shri Bhagwat contended that the ITO had erred in taking into consideration the element of excise duty for the purpose of valuation of closing stock. Shri Bhagwat admitted that the assessee had taken this element in to account for the purpose of obtaining loan from the banks, but he prayed that there was nothing wrong with the method by the assessee, for the simple reason that insofar as the loan facility is concerned, the real worth of the goods lying with the Bank would be not only the purchase consideration paid by the assessee but also the excise duty paid thereon by it. In view of the facts clarified by Shri Bhagwat with reference to entries in the relevant books and vouchers, I am satisfied that there was no justification for enhancing the value of the closing stock disclosed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, as per the past practice followed by our client average cost was arrived at without considering the element of excise duty and because of the lower cost, the financial record showed lesser stock. A detailed chart enclosed with the letter reveals that quantity of stock in both financial record as well as, as per the statement submitted to the Dena Bank, are the same, while valuing the stock in financial record, the company ignores the element of excise duty as the company gets "set off" while making payment of excise duty on its sales. The portion of the bill for purchase, relating to excise is being debited in finance record to "Central Excise Deposit Account". Further, the company recovers central excise from its customers on sales and this recovery is being credited to "Central Excise Recovery Account" and at the year end two accounts was carried forward to the balance-sheet. Thus, neither the payment on account of excise duty nor the recovery on account of excise duty enters into the computation of trading results and hence while valuing stocks in finance records the company has never considered excise duty element. The method is being followed by our client consistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion costs are ignored. Alternative P L a/c. . . Units, Rate, Amount Units Rate Amount To purchase of raw materials, 100 10 1000 By sales 60 15 900 Less: Stock of raw materials 40 10 400 . __ __ . . . 600 . __ __ To excise duty 60 3 180 . __ __ To gross profit, __ __ 120 . __ __ . . . 900 . . 900 The valuation of closing stock of raw material has been made in the aforesaid illustration at Rs. 10 per unit because the purchase price was also debited at Rs. 10 per unit (net of excise) and the amount of excise duty of Rs. 2 paid was separately debited as Modvat credit was available on the raw material purchased which could be set off against the excise duty payable on the finished product. The said illustration clearly explains that the method of accounting consistently followed by the assessee in relation to valuation of closing stock was one of the recognised methods and correct profits can be properly deduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A). 16.3 We have carefully considered the submissions made by the learned representatives and have also gone through the relevant documents and orders of the Departmental authorities. 16.4 We agree with the finding given by the CIT(A) holding that the method of valuation of the dies remaining in stock at the end of the respective year followed by the assessee is not a scientific and proper method. The assessee also could not properly explain as to how did they arrive at the number and value of dies written off during each year. In asst. yr. 1986-87, the CIT(A) has made similar observations with further finding that the value of a die, which is in use, its value cannot be reduced arbitrarily. In case the die becomes obsolete the assessee is entitled to write it off as scrap value. He has further arrived at the conclusion that since the assessee has not followed any recognised and consistent method but has reduced the value of dies in closing stock on an arbitrary basis, the addition made by the AO was considered to be justified by him. To the extent, the CIT(A) has observed that the assessee has not followed any scientific, recognised or proper method in respect of consump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The assessee will be entitled to submit a precise claim for grant of depreciation on dies for the years under consideration and the AO will be at liberty to consider the assessee's claim for grant of depreciation in accordance with the provisions of law. 17. The ground No. 3 for asst. yr. 1984-85 relates to confirmation of disallowance of Rs. 13,181 under s. 43B. 17.1 At the time of hearing, the learned counsel was fair enough to admit that disallowance under s. 43B has been restricted by the CIT(A) only to the extent of Rs. 13,181 out of the total disallowance of Rs.1,18,075 made in respect of outstanding sales-tax liability under s. 43B. This balance amount was not paid by the assessee within the time prescribed under s. 139(1). The aforesaid ground raised by the assessee, therefore, has no merit and is accordingly rejected. 18. The next ground in asst. yr. 1984-85 is that the CIT(A) has erred in not admitting the claim of deduction under s. 80J and/or 80HHA. 18.1 The CIT(A) rejected the said claim on the ground that no such claim was made before the ITO. Hence the question of allowing deduction under these sections by the AO did not arise. 18.2 After consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
